Gundlach's 'free money' trade is already paying off

The CEO of DoubleLine Capital who's sometimes described as Wall Street's 'bond king', told CNBC on Tuesday that betting on more stock-market volatility was an easy way to make money.

"I think going long the VIX is really sort of free money at a 9.80 VIX level today," Gundlach said, referring to the CBOE's Volatility Index. Described as the fear gauge, it tends to trade in the opposite direction to the S&P 500 and reflects traders' bets for outsized moves in the market.

"I believe the market will drop 3% at a minimum sometime between now and December," Gundlach said. "And when it does I don't think the VIX will be at 10."

The VIX has shot up from a low of 9.52 on Tuesday to around 16 on Friday amid escalating tensions between North Korea and the US. President Donald Trump tweeted early Friday that US military solutions were "locked and loaded" if North Korea acted "unwisely."

Gundlach said that alongside the market's decline, the VIX could rise to as high as 20. This call is less of a wager on a stock market drop, and more of a bet that the quietest market in decades would become more volatile, Gundlach said.

As Business Insider's Joe Ciolli wrote, betting against volatility was one of the most crowded trades through Wednesday. With the VIX climbing, traders may be forced to close out of those positions, and that would hasten the index's climb.

In July, Gundlach's firm bought some five-month put options on the S&P 500 amid the stock market's calm that took the VIX to its lowest level since 1993. The trade, Gundlach told Reuters, was "like free money."